By Wes Goodman Feb. 2 (Bloomberg) -- Treasuries fell for a second day on speculation U.S. lawmakers will dilute President Barack Obama’s “Volcker Rule” plan to restrict U.S. financial institutions, easing concern the proposal would crimp the economy. Thirty-year bonds led the decline as Paul Volcker, the former Federal Reserve chairman who has been advocating curbs on the size and trading activities of banks, prepared to testify before a Senate committee on the plan today. Obama’s proposal may be either significantly modified or dropped, DealReporter news service said, citing unidentified lawmakers and staffers. “I don’t think he’s going to introduce such a dramatic plan that will really slash the equities market,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “That should be good news for equities and bad news for fixed income.” BNP’s U.S. arm is one of the 18 primary dealers that trade directly with the Fed. The yield on the 30-year bond rose one basis point to 4.57 percent as of 7:06 a.m. in London, according to data compiled by Bloomberg. The 4.375 percent security due in November 2039 fell 3/32, or 94 cents per $1,000 face amount, to 96 27/32. MSCI’s Asia Pacific Index of shares advanced 0.9 percent, snapping a two-day decline and helping erode demand for the relative safety of government securities. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 15.8 basis points, the least since 2004. Australia Bonds Australian government bonds surged after the central bank unexpectedly decided against raising its benchmark interest rate from 3.75 percent. All 20 economists surveyed by Bloomberg News predicted a quarter-point increase. Two-year yields fell to a six-month low of 4.04 percent based on closing levels, according to data compiled by Bloomberg. DealReporter, part of the Financial Times Group, said in its article that Senate Banking Committee member Richard Shelby opposes the Volcker rule. Jonathan Graffeo, a spokesman for the Alabama Republican senator, said it is “off the mark” to suggest the proposal is unlikely to move ahead in the Senate. “Senator Shelby opposes the bank tax but believes that the Volcker rule requires further examination,” Graffeo said in an e-mail statement. Treasury yields dropped to the lowest level in a month when Obama announced the bank proposal on Jan. 21. Bond bulls say the U.S. is having trouble recovering from last year’s recession. A private report today will show sales of previously owned U.S. homes were little changed in December after a record plunge a month earlier, economists said, indicating the source of the global crisis has yet to mend. ‘Still Weak’ The financial crisis started with the collapse of the U.S. property market in 2007 and has triggered $1.73 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg. “The U.S. economy is still weak,” said Masaaki Sugihara, who is in charge of foreign debt at Toyota Asset Management Co. in Tokyo, which oversees $12 billion assets and is part of Japan’s biggest carmaker. “Demand for Treasuries is strong.” Treasuries returned 1.6 percent in January, the most since March, according to Bank of America Corp.’s Merrill Lynch unit. Japan Financial Services Minister Shizuka Kamei is urging Japan Post Bank Co., the government-owned lender and the world’s largest holder of deposits, to diversify its investments into U.S. Treasuries and corporate bonds. Almost 80 percent of Japan Post Bank’s funds go toward buying domestic government bonds, according to the Financial Times, which reported Kamei’s remarks. Japan Post had 195.7 trillion yen of assets as of Dec. 31, equivalent to $2.15 trillion, based on figures from the company’s Web site. Manufacturing Data Treasuries declined yesterday after a report showed manufacturing expanded last month at the fastest pace in more than five years and the Obama administration projected a record $1.6 trillion budget deficit. Yields on 30-year bonds rose the most two weeks yesterday after the Institute for Supply Management’s factory index gained and a separate report showed U.S. personal spending rose for a third month, renewing concern inflation will accelerate. A government report on Feb. 5 will show the U.S. economy added the most jobs in January since December 2007, according to a Bloomberg survey of economists. Inflation Expectations The U.S. will announce tomorrow how many three-, 10- and 30-year securities it will sell next week. U.S. yields are poised to rise, according to Nikhil Srinivasan, head for Asia at Allianz Investment Management, overseeing $30 billion in the region from his office in Singapore. “If things do slow in the U.S., there will be more pressure to spend more money,” he said. “The market will assume an inflationary element to that. My general sense is Treasury yields will go up over the year.” The company is a unit of Allianz SE, Europe’s largest insurer. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was 2.38 percentage points, versus the five-year average of 2.17 percentage points. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Source